Schauble’s toxic legacy and Italy’s mountain of debt

Wolfgang Schauble left a poisoned fruit on the Eurogroup table before leaving, a document in which he proposed to turn the current European Stability Mechanism (ESM) fund into a (totally free of politics) super-controller of national budgets. And much more.

Upon a state’s request for aid (such as those from Greece, Portugal and Ireland), it would automatically trigger the bankruptcy of that state. It would be a mechanism similar to that of the banking sector, which would decrease the ESM’s exposure (part of the burden would be borne by the investors). But it’s a sword of Damocles over the heads of countries on the edge, forcing them to reduce their debt according to a fiscal compact or be damned.

For Italy, this is a nightmare scenario. It is true that our debt, thanks to the slight recovery and cuts in public spending, has somewhat “stabilized” in relation to GDP, but its consistency, in absolute values, continues to be worrisome. Especially so in light of the end of quantitative easing (because of the risk of speculative attacks and a steep increase of interest rates).

We are talking about €2.3 trillion, which continues to grow inexorably, eating up resources that could be used for redistribution (€85-65 billion in interest charges per year between 2012 and 2016). Without going too far back in time (we should return to the “divorce” between the Treasury and the Bank of Italy), it is worth remembering that between 2008 and 2014, Italian debt slipped by 30 percent in relation to GDP, from 99.8 percent to 131.8 percent.

Why? The recession alone does not explain this. First of all, debt, in these conditions, is a self-sustaining monster (debt-interest spiral). Then there is also our participation in bank rescue operations on a European scale, or the miracle of the transformation of large private debts into public debts. By 2016, the amount of paid (debited) contributions from Italy to the Troika coffers in the form of loans to member states (either bilateral or through the European Financial Stability Facility) and participation in ESM capital was equal to about €58.2 billion. In percentage terms, that’s equal to 4 points of GDP. But that’s not all: In 2016, we established a new fund for rescuing banks, worth a total of €20 billion.

We can’t get out of it. The sacrifices that the Italian government has asked of us haven’t scratched the mountain of debt — they barely cover the interest. The sacrifices the former German finance minister would like to be implemented, however, would lead us directly into a humanitarian crisis.

What to do?

The first path is one we’ve been down: austerity and privatization. A convergence toward the Fiscal Compact goals “driven by the growing contribution of the primary surplus,” as is stated in the government’s latest update note to the Economy and Finance Document.

Is there another way? In the current framework, the path for E.U. states is really very tight. In theory, a debt restructuring would be possible, but what about the country’s reputation? The judgment of the markets? It would be like declaring bankruptcy (the premise from which Schauble started). The other solution requires intervention by the ECB. The Frankfurt institution should buy, at expiration date, interest-free debt securities of the Eurozone countries and convert them into irredeemable securities (no repayment is required).

If, as some of the proposals in the field foresee, the BCE issues bonds, its losses (the interest) would be offset by the states’ waiver of profits from financial activities — securities, foreign currency, loans to commercial banks — held in counterpart to the banknotes in circulation by the national central banks.

But is the climate favorable to these solutions? It would be difficult for the Schauble proposal to pass, but the fact that Germany raised that price says a lot about the intentions of its next government in reforming the monetary union.